Q&A Hero

Q: The theory of PPP suggests that if one country's price level rises relative to another's, its currency should A. depreciate in the long run. B. appreciate in the long run. C. depreciate in the short run. D. appreciate in the short run.

Q: If the U.S. Congress imposes a quota on imports of Japanese cars due to claims of "unfair" trade practices, and Japanese demand for American exports increases at the same time, then, in the long run ________, everything else held constant. A. the Japanese yen will appreciate relative to the U.S. dollar B. the Japanese yen will depreciate relative to the U.S. dollar C. the Japanese yen will either appreciate, depreciate or remain constant against the U.S. dollar D. there will be no effect on the Japanese yen relative to the U.S. dollar

Q: According to PPP, the real exchange rate between two countries will always equal A. 0.0. B. 0.5. C. 1.0. D. 1.5.

Q: If the real exchange rate between the United States and Japan is ________, then it is cheaper to buy goods in Japan than in the United States. A. greater than 1.0 B. greater than 0.5 C. less than 0.5 D. less than 1.0

Q: The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in A. the trade balances of the two countries. B. the current account balances of the two countries. C. fiscal policies of the two countries. D. the price levels of the two countries.

Q: The theory of purchasing power parity cannot fully explain exchange rate movements in the short run because A. all goods are identical even if produced in different countries. B. monetary policy differs across countries. C. some goods are not traded between countries. D. fiscal policy differs across countries.

Q: The theory of PPP suggests that if one country's price level falls relative to another's, its currency should A. depreciate in the long run. B. appreciate in the long run. C. appreciate in the short run. D. depreciate in the short run.

Q: If float is predicted to increase because of bad weather, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.A) defensive; injectB) defensive; drainC) dynamic; injectD) dynamic; drain

Q: The theory of PPP suggests that if one country's price level falls relative to another's, its currency should A. depreciate. B. appreciate. C. float. D. do none of the above.

Q: The Federal Reserve ________ pay interest on reserves held on deposit. The European System of Central Banks ________ pay interest on reserves held on deposit. A. does; does B. does; does not C. does not; does D. does not; does not

Q: The theory of PPP suggests that if one country's price level rises relative to another's, its currency should A. depreciate. B. appreciate. C. float. D. do none of the above.

Q: The equivalent to the Federal Reserve's discount rate in the European System of Central Banks is the A. federal funds rate. B. marginal lending rate. C. deposit facility rate. D. lombard rate.

Q: The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries. A. theory of purchasing power parity B. law of one price C. theory of money neutrality D. quantity theory of money

Q: When the European System of Central Banks uses long-term refinancing operations, it is similar to the Federal Reserve using A. dynamic open market operations. B. defensive open market operations. C. discount policy. D. reserve requirements.

Q: When the European System of Central Banks uses main refinancing operations, it is similar to the Federal Reserve using A. dynamic open market operations. B. defensive open market operations. C. discount policy. D. reserve requirements.

Q: The European System of Central Banks signals the stance of its monetary policy by setting a target for the A. federal funds rate. B. overnight cash rate. C. lombard rate. D. reserve rate.

Q: Which of the following statements is an example of the Fed's conditional commitment policy? A. "In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period." B. "The Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time." C. "Policy accommodation can be removed at a pace that is likely to be measured." D. "The exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, and inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal."

Q: To lower long-term interest rates, in 2010 the Fed started its new open market operation program to purchase A. mortgage-backed securities. B. commercial papers. C. long-term Treasuries. D. Treasury bills and Treasury notes.

Q: The interest rate for primary credit is usually set ________ basis points ________ the federal funds rate. In March 2008, this gap was changed to ________ basis points. A. 50; below; 100 B. 100; above; 25 C. 100; below; 50 D. 50; above; 25

Q: To lower interest rates on residential mortgages to stimulate the housing market, the Fed extended its open market operations to purchase A. mortgage-backed securities. B. commercial papers. C. long-term Treasuries. D. Treasury bills and Treasury notes.

Q: The purpose of the commitment by the Fed to keep the federal funds rate at zero for a long period of time is to A. lower the long term interest rates. B. lower the short term interest rates. C. increase the long term interest rates. D. increase the short term interest rates.

Q: The Fed's open market operations normally involve only the purchase of government securities, particularly those that are short-term. However, during the crisis, the Fed started new programs to purchase A. mortgage-backed securities and long-term Treasuries. B. mortgage-backed securities and Treasury bills. C. commercial papers and short-term Treasuries. D. Treasury bills and Treasury notes.

Q: Which of the following monetary policy tools is more effective when the economy faces the interest rate zero-lower-bound problem? A. open market operation B. discount policy C. required reserve ratio D. the Fed's liquidity provision

Q: The facility that was created in December of 2007 that banks can use to borrow from the Fed that has less of a stigma for banks compared to borrowing from the discount window is the A. Term Securities Lending Facility. B. Term Auction Facility. C. Primary Dealer Credit Facility. D. Commercial Paper Funding Facility.

Q: From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, the huge expansion in the Fed's balance sheet and the monetary base did not result in a large increase in monetary supply because A. most of it just flowed into holdings of excess reserve. B. the Fed also increased the required reserve ratio. C. the Fed also conducted open market sales. D. the discount loan decreased.

Q: From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, amount of Federal Reserve assets rose, leading to A. a huge increase in the monetary base. B. a huge expansion of the money supply. C. an economic expansion. D. a high inflation.

Q: Explain dynamic and defensive open market operations. What is the purpose of each type? Describe two situations when defensive open market operations are used. How are defensive open market operations typically conducted?

Q: When the Fed wants to raise interest rates after banks have accumulated large amounts of excess reserves, it would A. increase the interest rate paid on excess reserves. B. increase discount rate. C. increase the required reserve ratio. D. conduct massive open market purchase.

Q: The policy tool of changing reserve requirements is A. the most widely used. B. the preferred tool from the bank's perspective. C. no longer used. D. still used, even with its disadvantages.

Q: A decrease in ________ increases the money supply since it causes the ________ to rise. A. reserve requirements; monetary base B. reserve requirements; money multiplier C. margin requirements; monetary base D. margin requirements; money multiplier

Q: Funds held in ________ are subject to reserve requirements. A. all checkable deposits B. all checkable and time deposits C. all checkable, time, and money market fund deposits D. all time deposits

Q: An increase in ________ reduces the money supply since it causes the ________ to fall. A. reserve requirements; monetary base B. reserve requirements; money multiplier C. margin requirements; monetary base D. margin requirements; money multiplier

Q: Since 1980, ________ are subject to reserve requirements. A. only commercial banks B. only the member institutions of the Federal Reserve C. only nationally chartered depository institutions D. all depository institutions

Q: The most important advantage of discount policy is that the Fed can use it to A. precisely control the monetary base. B. perform its role as lender of last resort. C. control the money supply. D. punish banks that have deficient reserves.

Q: The Federal Reserve has had the authority to vary reserve requirements since the A. 1920s. B. 1930s. C. 1940s. D. 1950s.

Q: The Fed's lender-of-last-resort function A. has proven to be ineffective. B. cannot prevent runs by large depositors. C. is no longer necessary due to FDIC insurance. D. creates a moral hazard problem.

Q: A financial panic was averted in October 1987 following "Black Monday" when the Fed announced that A. it was lowering the discount rate. B. it would provide discount loans to any bank that would make loans to the security industry. C. it stood ready to purchase common stocks to prevent a further slide in stock prices. D. it was raising the discount rate.

Q: Much of the credit for prevention of a financial market meltdown after "Black Monday" (October 19, 1987) must be given to the Federal Reserve System and then-chairman A. Paul Volcker. B. Alan Blinder. C. Arthur Burns. D. Alan Greenspan.

Q: At its inception, the Federal Reserve was intended to be A. the Treasury's banker. B. the issuer of government debt. C. a lender-of-last-resort. D. a regulator of bank holding companies.

Q: The Fed is considering eliminating A. primary credit lending. B. secondary credit lending. C. seasonal credit lending. D. its lender of last resort function.

Q: Assume that no banks hold excess reserves, and the public holds no currency. If a bank sells a $100 security to the Fed, explain what happens to this bank and two additional steps in the deposit expansion process, assuming a 10% reserve requirement. How much do deposits and loans increase for the banking system when the process is completed?

Q: The interest rate on seasonal credit equals A. the federal funds rate. B. the primary credit rate. C. the secondary credit rate. D. an average of the federal funds rate and rates on certificates of deposits.

Q: Decisions by ________ about their holdings of currency and by ________ about their holdings of excess reserves affect the money supply. A. borrowers; depositors B. banks; depositors C. depositors; borrowers D. depositors; banks

Q: The interest rate on secondary credit is set ________ basis points ________ the primary credit rate. A. 100; above B. 100; below C. 50; above D. 50; below

Q: Decisions by depositors to increase their holdings of ________, or of banks to hold excess reserves will result in a ________ expansion of deposits than the simple model predicts. A. deposits; smaller B. deposits; larger C. currency; smaller D. currency; larger

Q: The discount rate refers to the interest rate on A. primary credit. B. secondary credit. C. seasonal credit. D. federal funds.

Q: Decisions by depositors to increase their holdings of ________, or of banks to hold ________ will result in a smaller expansion of deposits than the simple model predicts. A. deposits; required reserves B. deposits; excess reserves C. currency; required reserves A) currency; excess reserves

Q: A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the reserve requirement is 25 percent. If the reserve requirement is lowered to 20 percent, the bank's excess reserves will be A. $1,000. B. $5,000. C. $8,000. D. $9,000.

Q: A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the reserve requirement is 20 percent. If the reserve requirement is lowered to 10 percent, the bank's excess reserves will be A. $1,000. B. $8,000. C. $9,000. D. $17,000.

Q: A bank has no excess reserves and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will now be A. -$5,000. B. -$1,000. C. $1,000. D. $5,000.

Q: A bank has excess reserves of $10,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be A. -$5,000. B. -$1,000. C. $1,000. D. $5,000.

Q: Suppose a person cashes his payroll check and holds all the funds in the form of currency. Everything else held constant, total reserves in the banking system ________ and the monetary base ________. A. remain unchanged; increases B. decrease; increases C. decrease; remains unchanged D. decrease; decreases

Q: A bank has excess reserves of $4,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be A. -$5,000. B. -$1,000. C. $1,000. D. $5,000.

Q: An increase in ________ leads to an equal ________ in the monetary base in the short run. A. float; decrease B. float; increase C. discount loans; decrease D. Treasury deposits at the Fed; increase

Q: A bank has excess reserves of $6,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be A. -$5,000. B. -$1,000. C. $1,000. D. $5,000.

Q: The monetary base declines when A. the Fed extends discount loans. B. Treasury deposits at the Fed decrease. C. float increases. D. the Fed sells securities.

Q: If a bank has excess reserves of $7,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 10 percent, then the bank has actual reserves of A. $14,000. B. $17,000. C. $22,000. D. $27,000.

Q: A decrease in ________ leads to an equal ________ in the monetary base in the short run. A. float; increase B. float; decrease C. Treasury deposits at the Fed; decrease D. discount loans; increase

Q: There are two ways in which the Fed can provide additional reserves to the banking system: it can ________ government bonds or it can ________ discount loans to commercial banks. A. sell; extend B. sell; call in C. purchase; extend D. purchase; call in

Q: If the Fed decides to reduce bank reserves, it can A. purchase government bonds. B. extend discount loans to banks. C. sell government bonds. D. print more currency.

Q: When the Federal Reserve calls in a discount loan from a bank, the monetary base ________ and reserves ________. A. remains unchanged; decrease B. remains unchanged; increase C. decreases; decrease D. decreases; remains unchanged

Q: When the Federal Reserve extends a discount loan to a bank, the monetary base ________ and reserves ________. A. remains unchanged; decrease B. remains unchanged; increase C. increases; increase D. increases; remain unchanged

Q: All else the same, when the Fed calls in a $100 discount loan previously extended to the First National Bank, reserves in the banking system A. increase by $100. B. increase by more than $100. C. decrease by $100. D. decrease by more than $100.

Q: The research document given to the Federal Open Market Committee that contains information on the state of the economy in each Federal Reserve district is called the A. beige book. B. green book. C. blue book. D. black book.

Q: Although reserve requirements and the discount rate are not actually set by the ________, decisions concerning these policy tools are effectively made there. A. Federal Reserve Bank of New York B. Board of Governors C. Federal Open Market Committee D. Federal Reserve Banks

Q: When the Fed extends a $100 discount loan to the First National Bank, reserves in the banking system A. increase by $100. B. increase by more than $100. C. decrease by $100. D. decrease by more than $100.

Q: Each Fed bank president attends FOMC meetings; although only ________ Fed bank presidents vote on policy, all ________ provide input. A. three; ten B. five; ten C. three; twelve D. five; twelve

Q: When the Fed sells $100 worth of bonds to a primary dealer, reserves in the banking system A. increase by $100. B. increase by more than $100. C. decrease by $100. D. decrease by more than $100.

Q: The majority of members of the Federal Open Market Committee are A. Federal Reserve Bank presidents. B. members of the Federal Advisory Council. C. presidents of member banks. D. the seven members of the Board of Governors.

Q: The Federal Open Market Committee consists of the A. five senior members of the seven-member Board of Governors. B. seven members of the Board of Governors and seven presidents of the regional Fed banks. C. seven members of the Board of Governors and five presidents of the regional Fed banks. D. twelve regional Fed bank presidents and the chairman of the Board of Governors.

Q: The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the A. Board of Governors. B. chairman of the Board of Governors. C. Federal Open Market Committee. D. Open Market Advisory Council

Q: The Federal Open Market Committee usually meets ________ times a year. A. four B. six C. eight D. twelve

Q: Which of the followings is NOT a current duty of the Board of Governors of the Federal Reserve System? A. setting margin requirements, the fraction of the purchase price of the securities that has to be paid for with cash B. setting the maximum interest rates payable on certain types of time deposits under Regulation Q C. approving the discount rate "established" by the Federal Reserve banks D. voting on the conduct of open market operations

Q: Which policy measure requires investment banks to make public their analysts' recommendations? A. Sarbanes-Oxley Act of 2002 B. Global Legal Settlement of 2002 C. Gramm-Leach-Bliley Act of 1999 D. Riegle-Neal Act of 1994

Q: Which of the followings is a duty of the Board of Governors of the Federal Reserve System? A. setting margin requirements, the fraction of the purchase price of the securities that has to be paid for with cash B. setting the maximum interest rates payable on certain types of time deposits under Regulation Q C. regulating credit with the approval of the president under the Credit Control Act of 1969 D. All governors advise the president of the United States on economic policy.

Q: Which policy measure bans spinning? A. Sarbanes-Oxley Act of 2002 B. Global Legal Settlement of 2002 C. Gramm-Leach-Bliley Act of 1999 D. Riegle-Neal Act of 1994

Q: While the discount rate is "established" by the regional Federal Reserve Banks, in truth, the rate is determined by A. Congress. B. the president of the United States. C. the Senate. D. the Board of Governors.

Q: Which policy measure requires investment banks to sever the links between research and securities underwriting? A. Sarbanes-Oxley Act of 2002 B. Global Legal Settlement of 2002 C. Gramm-Leach-Bliley Act of 1999 D. Riegle-Neal Act of 1994

Q: The Chairman of the Board of Governors is chosen from among the seven governors and serves a ________, renewable term. A. one-year B. two-year C. four-year D. eight-year

Q: Which of the following is a part of the Global Legal Settlement of 2002? A. The establishment of a Public Company Accounting Oversight Board (PCAOB) to supervise accounting firms and thus insure that audits are independent and controlled for quality. B. Increased penalties for white-collar crime and obstruction of official investigations. C. Requires a CEO and CFO to certify that periodic financial statements and disclosure of the firm are accurate. D. Requires investment banks to make public their analysts' recommendations.